Can the UK’s ailing economy learn from Germany?

Blue funk has broken out again at the state of the British economy. After months of woozy staggering, the UK has sunk into a double-dip recession, according to figures released Wednesday. The statistics, published by the Office for National Statistics, show that the British economy shrank by 0.2 per cent in the first quarter of 2012, following a 0.3 per cent contraction in the last three months of 2011. This pushes the UK squarely into recession territory. Failure seems to have seeped into every sinew of the economy: production has slumped, the number of people claiming benefits is climbing, and unemployment lingers stubbornly above 8 per cent.

But in Germany the economic prognosis could not be more different. The latest figures show that the German economy grew by 0.4 per cent in the second quarter of this year. On Wednesday the German government also published a positive official growth forecast for 2012. Unemployment has fallen to a record low of 6.7 per cent.

So why is the German economy showing such stomach for the fight against the global downturn while Britain swoons from its toxins?

Admittedly, there is something to be said for the argument that Germany is doing better now simply because it was less vulnerable when the financial crisis hit: Germany’s budget deficit was relatively small and people were also generally less indebted at the time. But such a simplistic explanation seems to lack rigour.

Are there then deeper lessons that the coalition could learn from how Germany has managed to withstand the international slump?

This question is not posed with the sentiment that the UK should try and copy Germany in every way or that the German economy is faultless. Far from it- experts have argued compellingly that on closer inspection the German economy has its own anthology of flaws. Its professional industries are over-regulated and it is dangerously reliant on a narrow portfolio of exports, its critics stress. Germany’s entrepreneurs also stand accused of being risk averse, lagging behind on innovation and lacking ambition.

But it is difficult to get away from the fact that Germany is still doing markedly better than the UK. And there are things we should take note of.

Firstly, Osborne could learn a few lessons on how to effectively squeeze out emergency funds during a financial crisis from his German counterparts. This argument is a subtle one because at first glance it is hard to see anything different in the response of Chancellor Merkel’s government to the global slowdown; the conservative German government has succumbed to the same austerity mania that has consumed the coalition’s policy-making, having preached growth-crushing thrift for indebted European countries like Greece and Spain and committed Germany itself to 80 million euros worth of cuts in 2010. Merkel’s measures for her own country included cutting welfare allowances for jobless parents, scrapping military service and shedding thousands of civil service jobs.

But the crucial difference is that Germany has also been able to fall back on its more rigorous and functional tax system in order to balance the books without completely taking an axe to social security. According to a report released Wednesday, Germany is the second most taxed OECD country after Belgium. Perhaps then the British government should have balanced cuts with a coherent and fair formula of higher taxes to diversify our emergency revenue stream.

Germany has also responded to uncertainty in its domestic market as a result of the economic crisis by making a big drive to boost its exports abroad, thus injecting much needed capital into the economy. So has Chancellor Osborne, but the discrepancy in ambition is all too obvious. China is a case in point- while Germany aims to increase its bilateral trade with the country to $280 billion by 2015, the UK’s goal is to boost the amount to only $100 billion by the same year.

Also, while Whitehall is focusing a lot of its energies on courting the BRICs Germany has shown a striking energy for engaging with obscurer but spectacularly-growing frontier countries. Take Mongolia, a country awash with mineral resources, which recently overtook Qatar as the world’s fastest growing economy. The country has expressed an urgent need for advanced technological expertise and infrastructure so it can exploit its natural resources and Germany is only too willing to oblige – Merkel recently became the first world leader from the advanced industrialised world to visit the country in six years. Or consider Kazakhstan, another impressively growing country: its total bilateral trade with Germany, worth more than £4 billion in 2010, puts the UK’s total trade with the country in the same year, a paltry £380 million, to shame.

Experts have also proffered some compelling long-term reasons for Germany’s outperformance of the UK.

Firstly, Germany is better at manufacturing than Britain. It ranked eighth in the latest Global Manufacturing Competitiveness Index. The UK trailed behind in 17th position. In particular, the knack that manufacturing-focused medium-sized companies in Germany, known as Mittelstand, have for identifying unsexy but highly profitable niches and zealously exporting their products abroad has been jealously registered by other countries.

Meanwhile, the UK is too preoccupied with supporting its largest and smallest industrial firms and neglects the medium-sized ones argues the British Trade Union Council (TUC) in a report. The TUC also contends that graduates are less likely to choose a career in industry in Britain and that Germany makes more of apprenticeships and vocational training to lure fresh talent into this aspect of its economy.

Secondly, Germany has invested in its labour pool more effectively. It has focused heavily on improving the performance of its school-goers with positive results. More German students have a higher proficiency level in maths, for example. There is also a bigger emphasis on a dual system fusing vocational and academic training in Germany, which ensures people are better prepared for working life.

Thirdly, even though Germans are taxed more they have a relatively high purchasing power, which has kept them spending through the economic crisis. This week the German government released figures projecting that purchasing power will rise by 3 per cent this year.

The fact that Germans have more money to spend despite high taxes is a crucial one. This lends credence to the idea that the healthier diffusion of wealth in Germany, which ensures that even the less well off have a decent income, may be the key difference between the two countries. Indeed, comparative figures on wealth distribution are revealing- in Germany the top 1 per cent of households earn roughly 11 per cent of all income. In the UK that figure is significantly more.

In addition, Germany’s lower unemployment levels may be attributed to the fact that it has pushed through reforms of its welfare system, including unemployment benefits, much more quickly than the UK. In 2003, the then Chancellor Gerard Schroeder introduced a reform package known as Agenda 2010. It included limiting the maximum duration that a person can claim benefits to 12 months and modelling the state unemployment agency on successful private firms, as well as giving the authorities the power to slash benefits for job seekers that turned down employment offers. Not working in Germany is perhaps then a much less attractive prospect than it is in the UK.

A greater willingness to experiment based on the successes of countries like Germany is just the kind of creative verve that the UK needs to inject into its growth policy. But so far the coalition has seemed unwilling to stray from its one-dimensional austerity approach. This is a big mistake. As a very sage Canadian-American economist once said, “in economics it is a far, far wiser thing to be right than to be consistent”.

It is the Ruhr that makes Germany so wealthy combined with the Euro that stops manufactured items for export becoming excessively expensive. The useful thing our govenment could learn from Germany is that instead of simply taxing everything to stay wealthy, it could adopt a similiar regional development plan: in Germany the Ruhr is an industrial region with raw material extraction located next to processing plants which in turn are close to factories which are surrounded by towns supporting millions of workers. In simple terms it’s a jigsaw, you just have to join-up the dependent parts and then focus on the single objective of making it work together in a fairly efficient manner which incidently starts at school, with a positive attitude towards getting things done to a high standard.